MidAmerican Energy and its partners plan to submit an application to the State of Alaska to build a natural gas pipeline from the North Slope, David L. Sokol told Petroleum News Aug. 7. Sokol is CEO of MidAmerican Energy Holdings Co., parent of Kern River Gas Transmission Co., which has served as MidAmerican’s lead for the Alaska gas line project.
The only thing that could stand in the way of MidAmerican’s application, he said, was if the FBI investigations and indictments of Alaska State and U.S. lawmakers would somehow “circle back to implicate any of the producers. If they do, our concern is the process might negatively impact a gas line project from a timing standpoint.”
Applications for a project to take North Slope gas to Lower 48 markets have to be filed under the Alaska Gasline Inducement Act by Nov. 30. Strongly supported by Alaska Gov. Sarah Palin, AGIA passed at the end of the 2007 legislative session despite intense criticism from the North Slope’s three oil producers and gas owners, BP, ConocoPhillips and ExxonMobil. The three mega-majors, which own controlling interest in the 800-mile trans-Alaska oil pipeline, have indicated it’s imperative they also own controlling interest in a gas line in order to keep project costs down. They say AGIA, as written, won’t work.
The three companies have not said whether they will file a pipeline application. Paul Laird, general manager of the Alaska Support Industry Alliance, told Petroleum News Aug. 8 that he expects two of the three companies to file, “possibly with partners, one or more applications that do not conform to AGIA’s specifications.”
Sokol’s openness unusualThe fact that Sokol would say whether or not MidAmerican was preparing an application was unusual, but he believed the circumstances warranted it.
“We wouldn’t normally answer that question because it is a competitive situation, but I would say it has been startling to us how many people and organizations have been trying to infiltrate our team to find out the answer to that question. There have been quite a number of people trying to dissuade us from applying, or do things of that nature,” he said.
Calls rumors about Morgan ‘malicious’Another irritant for the pipeline giant has been the rumor that Kern River President Kirk Morgan was fired by MidAmerican at the end of May because of his positive testimony on AGIA to the Alaska Legislature — a rumor that Sokol called “malicious” and “inappropriate.”
Sokol said he and Morgan were “on the same page” regarding the Alaska gas line project and that Morgan “was not fired. Not by any means. Frankly, we considered Kirk one of our most valuable senior managers. He made a decision for personal, family reasons to take an early retirement. We preferred that he stayed, but we respected his decision. We would welcome him back tomorrow.”
The rumor about Morgan “is just another effort by some of the folks who don’t want the pipeline built … under AGIA, and wish to discredit efforts under AGIA. It’s insulting people would even make such accusations,” Sokol said.
“We will continue to work on the pipeline application,” he said. “Our intention is to file under AGIA, but whether we do depends on the circumstances between now and the filing date. The unfortunate corruption scandals involving the oil and gas industry in Alaska that have been published in the press … we just don’t know where it will stop. … It’s very good Alaska’s had a change in administrations and we support the Palin administration. But you have two members of the Alaska Congressional delegation under investigation, allegations made against another, and indictments against state legislators. We know only what we read in the news. We don’t know where those indictments will stop.”
MidAmerican will apply with partnersWhen asked if MidAmerican and Kern River would submit a gas line application with partners, Sokol said yes, but he would not reveal the identity of those partners because he was concerned they would be subjected to the same pressure MidAmerican has been.
“In light of the pressure that’s been put on us, we think we are doing our potential partners a favor by not identifying them,” he said, noting MidAmerican would name its partners when it was necessary to do so under the AGIA process.
Another rumorAnother rumor circulating in Alaska’s oil patch is that the state isn’t going to receive any credible bids under AGIA. A version of that rumor has already made its way across the border. Calgary-based Enbridge CEO Pat Daniel told analysts Aug. 1 that his information indicates there is “not a lot of active interest for trying to mount a project without producers’ support.”
Daniel said Enbridge officials “continue to advise the governor and the state that unless they can get a consortium of producers together to file under the AGIA we won’t be a participant in the process.”
In his testimony to the Alaska Legislature about AGIA, Morgan said, “even if a pipeline is developed by an independent developer, the North Slope producers will play a critical role as shippers on the line and sellers of gas to other shippers.”
“MidAmerican, as an independent pipeline, is impartial and in a unique position to help facilitate solutions where stakeholders’ interests diverge,” he said, noting that unlike the three producers, MidAmerican had no competing interests in the upstream, downstream or globally.
Morgan also admitted the project was more risky with unwilling gas sellers, but he said, AGIA had mitigated much of that concern — and he believed that if money could be made by selling gas, BP, ConocoPhillips and ExxonMobil shareholders would want the gas sold.
Why is the gas that is owned by the three majors so important to a gas line project?
Despite the fact that government estimates put northern Alaska’s undiscovered, technically recoverable natural gas at more than 200 trillion cubic feet, explorers on gas-prone acreage, such as Anadarko and BG, have been reluctant to move forward with exploration and development until they were relatively certain a gas pipeline would be built to take North Slope gas to market.
Hence, expectations that the Prudhoe Bay oil field with its 24.5 trillion cubic feet of discovered gas reserves, would produce the first gas for a pipeline. Prudhoe is essentially owned in equal parts by BP, ConocoPhillips and ExxonMobil, with the fourth largest owner being Chevron, which holds a 1 percent interest.
What about costs?So, what about costs? Gas prices are high now, but what if they drop? Opponents of an independent gas line say the producers will be more concerned about keeping construction costs low because they’ll be shipping gas in the line, whereas a pipeline company such as MidAmerican isn’t going be as worried about cost overruns because it can simply charge a tariff based on whatever the pipeline costs them to build.
Petroleum News turned to Alaska Revenue Commissioner Pat Galvin for an answer.
“You have to look at where a pipeline company makes its money,” he said. “They make their money based on how much gas is run through the line. The more gas, the more money for them. If you have a bloated tariff, you’re not going to get companies to invest in exploration and development of gas fields on the North Slope to put gas into the line.”
Selling gas into the pipeline “has to be economic for gas producers in order for a pipeline company to make a profit.” Galvin said. “It’s in a pipeline company’s best interest to keep the cost of building the line low, so their tariff makes producing gas in Alaska competitive with projects worldwide.”
Plus, he said, there are parts of AGIA that deal with cost overruns, making the pipeline company “take some of that risk themselves. It couldn’t simply pass along overruns to the gas producers. That’s pretty standard elsewhere, in modern pipeline contracts. … That’s why we moved this project under AGIA into a transparent process, as compared to the process under the Murkowski administration. Under AGIA we can talk about the level of risk companies take on rather than just speculate.”
Galvin also said he’s not surprised at the number of rumors in circulation.
“There is a campaign of misinformation going on to give the impression the project under AGIA is dead in the water,” he told Petroleum News Aug. 7.
A week earlier, he’d said, “AGIA is a competitive process, so we can expect, and in fact we are seeing, a lot of misdirection and misinformation floated around. … We probably won’t know until the application deadline what the parties’ true intentions may be.”